Profits Tax - post cessation expenditures and receipts

The date of business cessation is a question of facts. In practice, the IRD adopts the day reported by the taxpayer to the Business Registration Office.

According to Section 15D(2) of IRO, all business expenditures paid after the business cessation are deductible providing they would have been deductible had they been paid before the cessation. If a profits tax assessment has been final and conclusive under Section 70, the taxpayer can claim the deduction by virtue of Section 70A.

According to Section 15D(1), all business receipts after the cessation are taxable on such basis as if they were received before the cessation. In fact, this rarely happens in practice because there should be no trading after the cessation. Anyway, the IRD has the power to raise an additional assessment under Section 60 to assess such business receipts in case they have not been assessed in the original assessment. The time limit for making an additional assessment is 6 years after the end of the relevant year of assessment. However, if the cessation is due to the death of a sole trader before 11 February 2006, the time limit is 1 year after the death or 1 year after the filing of affidavit for the deceased's estate, whichever is the later. If the death occurs on 11 February 2006 or later, the time limit is 3 years after the end of the year of assessment in which the death occurs.

There are special provisions with regard to valuation of trading stock on business cessation. Where the stock is sold to a person who will use the stock in a business carried on in Hong Kong and will be claiming the purchase cost as a deductible expense, the actual sales proceeds will be adopted for the valuation. In any other cases the valuation will be the estimated open market value as at the cessation day.

A balancing allowance (a deduction from assessable profit) may arise on business cessation in case the reducing value of machinery or plant exceeds their disposal proceeds. If the reducing value is less than the disposal proceeds, the difference will be a balancing charge (a taxable receipt). Where the assets are transferred to another person succeeding the business, there will be no balancing adjustments and the successor will inherit the reducing value and get an annual allowance. Where there is no sale and no successor, the IRD will estimate their open market value as at the business cessation --- in practice the IRD will take the reducing value as their open market values so that no balancing adjustment is necessary. However, if an asset is sold at a price less than the estimated open market value within one year after the cessation, the taxpayer can claim balance allowance based on the actual sales proceeds instead of the estimated value.